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Euronav Results & Bonus Interview

|About: Euronav NV (EURN), Includes: DHT, FRO
Summary

Euronav (EURN) reported their results today.

Headline numbers distorted by one-offs, actual results quite strong.

They underperformed our expectations in Suezmax and a bit on VLCC, but their forward guidance is very impressive.

Last week, we hosted Paddy Rodgers (CEO of EURN) for a private interview and live chat discussion on Value Investor's Edge.

Full interview & discussion shared below.

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Live Chat Transcript - 18 January 2019, 0900 EST

J Mintzmyer

Good morning everyone. Welcome to the inaugural "Live Chat" here at Value Investor's Edge. Many thanks for Paddy Rodgers of Euronav (EURN) for joining us here.

Are we good to go on your end? If so, welcome to the chat Brian & Paddy, and thank you very much for your time today!

Brian Gallagher - Head of IR, Euronav

Good morning or afternoon to you all, this is Brian Gallagher head of IR at EURONAV, sitting with Paddy Rodgers CEO of EURONAV - we are ready to go

J Mintzmyer

Excellent. Basic setup as we discussed, we'll do about 15 minutes of some questions between us and then open it up to anyone who would like to submit a question! Feel free anyone to add emotes/reactions to the posts as well.

Starting it off with a broad one...:

Euronav typically has very balanced or even conservative presentations, but recently I've noticed a trend towards a more bullish posture. Is this the most bullish you've been in at least a few years? How do you think the forward market looks compared to the last bullish run which started in late-2014?

Paddy Rodgers - CEO, Euronav

We spend a lot of time and effort on our presentations and communications – I notice that Seeking Alpha often uses them which we are grateful for. We use a traffic light system in our quarterly calls and we upgraded two of the lights in August when rates were at $10k per day and we were questioned why. We could see the market was tighter and more balanced than most commentators suggested and this was proved with the performance in October and November especially in the VLCC market.

What is different is that the strong market we saw in late 2014 was accompanied by a strong contango pricing structure at that time and a low order book. However a lot of the other building blocks are the same – demand is robust supported by a fall in the oil price; ton mile growth is expanding this time via US exports; oil supply is in good shape and the market is more consolidated this time around. With IMO 2020 coming we believe there are similarities between the two.

J Mintzmyer

Thanks Paddy.

On that IMO front, you've set Euronav up on an interesting footing with no installed scrubbers. What do you see as the biggest risk to this approach? If spreads spike, how many scrubbers might you attempt to install? Or would you eat the losses and hope for spreads to drop back down?

Paddy Rodgers

We are skeptics on scrubbers. Our key concern is that we are being asked to invest shareholders capital upfront with no certainty or visibility of a return. To retrofit our fleet would cost $350M or 20% of our market cap.

We will continue to monitor progress and developments in this area but we would like to see fuller analysis and research and road testing of the technology before committing.

If we are wrong we have a strong balance sheet and operational capability with 2 ULCC (3m bbl vessels) to capture the benefits should they become clear and accepted by all market players.

J Mintzmyer

Certainly a strong amount to commit to uncertain returns, hard to disagree with that.

I know the visibility is lower, but what sort of spread indications are you seeing/expecting thus far between compliant fuels? What is the sort of backup plan here? Would it be to just eat the spread or send part of the fleet to get fitted up? My understanding is that yard spots are full through at least mid-2020?

Paddy Rodgers

Very early days in terms of spread but seen prints of $40-100 premium of LSFO over HSFO in first few weeks of this year.

Plan B? if scrubbers are accepted by all the major players, there is no perceived risk of a ban and the spread is looking to very large then clearly we are pragmatic but can use the balance sheet to purchase HSFO as it is heavily discounted and then make the capital spend on part of the fleet having captured the opex benefit with the cheaper fuel.

To put this into context 1x ULCC could store around half our annual fuel requirement for a year and if the HSFO is being sold for $100 per tonne say in absolute terms that is $15 per barrel.

In terms of yard capacity we would be more skeptical. lets not forget we are looking for say 30 slots to cover roughly half our fleet so we are not that demanding.

J Mintzmyer

Copy all, definitely a lot of shifting factors to look at, but good to see you have the financial flexibility to shift course and be adept if need be.

Paddy Rodgers

Exactly this is very dynamic.

J Mintzmyer

On a related note, Euronav has a rock-solid balance sheet with $677M in last reported liquidity prior to several asset sale and strong expected Q4 cash flow. Meanwhile you have no capex plans. What is your top priority with this cash? I do know you've targeted a 2-year liquidity runway, are we comfortably there?

Paddy Rodgers

In our presentation deck we have a capital allocation slide – in addition to the fixed 12c dividend we see 5 homes for cash – in no particular order:

  1. Enhanced cash dividend
  2. Share buy backs
  3. Repayment of debt
  4. Where possible accretive M&A based on strict set of criteria
  5. Acquisition of ships

We look at these five constantly – currently we have a buy back program ongoing.

A two year liquidity runway would account for around $550m of that liquidity so some headroom above it at present but also remember no outstanding capex. Reference posted slide:

J Mintzmyer

Makes sense to me. I know you've done fantastic with your equity management, so you hardly need 'advice' from me, but I would certainly urge buybacks to be the #1 priority if you continue to trade at a sizable discount to NAV.

Related to buybacks, just more of a housekeeping question here, but you've recently been repurchasing a significant amount of shares. Is this part of the set capital returns program, or is this separate (i.e. not bound by reported EPS)?

Paddy Rodgers

Well we have been buying back since December 18 and as always appreciate shareholders views on this. This is an opportunistic given the discount of the share price to NAV but part of the wider capital allocation strategy.

J Mintzmyer

Makes sense, especially in line with what you mentioned above. Quick clarification, something a lot of us have been wondering:

Why are you holding shares in the treasury instead of simply cancelling them? Is there some sort of tax or regulatory benefit?

Paddy Rodgers

Currently holding them in treasury for the moment as we assess some additional schemes for value but will be cancelled in due course.

J Mintzmyer

Any example/insight into what an "additional scheme for value" might entail?

Paddy Rodgers

In terms of scheme for value - assessing Belgian issues on whether these shares could be used in a tax efficient way for incentive schemes that's all.

J Mintzmyer

Understand, perhaps instead of issuing a separate basket of shares for G&A, etc... Same end result, just different flows...

Paddy Rodgers

Yes.

J Mintzmyer

I'll ask a broad question here to close my portion out then turn over to the overall group.

We often learn the most by what firms say about their competitors. Besides Euronav obviously, what tanker stock would you be most interested in buying today? What tanker firm has the best management team besides EURN?

Paddy Rodgers

Good question. We respect all of our peers. DHT Holdings (DHT) have a good operation and very solid structure but the public seem to like Frontline (FRO) in terms of rating.

J Mintzmyer

Understand and that matches our observations as well. I hope that if trading dislocations ever develop again, you'll be ready to go like with Gener8 Maritime last year!

Super quick related:

On a personal basis and outside of tankers, but still inside the broad shipping industry? What company or companies do you find the most exciting?

Paddy Rodgers

The large tanker space occupies all of my time I am sad to say!

...but product tankers looks an interesting space at present.

J Mintzmyer

Touche. I'm glad to see you're staying focused. Not surprised the ancillary segment has the most interest as well, especially with IMO 2020 around the corner.

Paddy Rodgers

...plus it is genuinely consolidating.

J Mintzmyer

Thank you for participating in the 1-on-1 'interview' section. I know we've ran a bit longer than we anticipated. Are we okay to do 4-5 questions from the broad audience over the next 10 minutes or so?

Paddy Rodgers

Of course - enjoying this format and keen to repeat!

Joeri van der Sman

Euronav depreciates in 20 year to 0 (not to scrap). This is by far the most aggressive write down policy I'm aware of. The benefit is that you usually are able to book nice book-profits on disposals, especially when you are selling older vessels. The downside is that it under represents your earnings. Is there a particular reason for EURN's depreciation choice? Is it tax related maybe?

Paddy Rodgers

No not tax related at all but our considered view that this is the most appropriate reflection of the life of a large crude tanker. Since 2011 average scrapping age of a VLCC is 20.6 years; with regulations getting tighter and customers more focused on taking tonnage below 15 years of age we believe our policy continues to look correct.

Depreciation in tankers is a REAL cost remember. these are short life, capital intensive assets. 20 years is the correct approach to zero.

Joeri van der Sman

Thanks for the clear answer. To 0 instead to scrap still makes a large difference.

J Mintzmyer

Just sliding in real quick, as I certainly agree on the 20y policy, I find it very responsible. Is there a reason why you do 20y to zero and not say 20y to $300/LDT or something similar?

Paddy Rodgers

Because scrap price is very difficult to forecast. Since 2010 VLCC scrap has been at $20m and $10m.

J Mintzmyer

Understand, so log the gain separately based on where scrap is at, plus the policy keeps you from ever getting carried away on earnings. Not sure I agree 100% on going to "zero" versus at least some number, but I do enjoy the conservative accounting policy.

Paddy Rodgers

Our policy is clear, transparent and we strongly believe the most appropriate and applicable. ignoring depreciation has cost shipowners in the past.

J Mintzmyer

Certainly will keep you out of trouble! Thanks Joeri van der Sman for the great question. Next?

Tommy Goula

The future of oil exports seems to be slowly migrating away from the Arabian Gulf and to the US Gulf. What expectations do you have as to how this will affect the crude tanker industry? Do you see the greatest increase from this in the VLCC class or will mid sized and smaller tankers benefit?

Paddy Rodgers

Ultimately we see VLCC as the key beneficiary especially as the US export capacity ramp up continues at the ports in US Gulf.

This route is long ton miles as the majority of this export will go to Asia - don't forget cannot take a VLCC through the Panama canal so no short cuts. China in particular wants scale and it is more cost effective to transport crude in largest quantity possible. Small and mid sized will get some benefit but limited

500k/bpd increase in a year of US exports to Asia takes 20 VLCC - so its a powerful multiplier effect.

J Mintzmyer

I love this slide from your December presentation, btw, as it relates!

Paddy Rodgers

Thanks J. Also, don't forget when we talk of Atlantic - we also mean Caribs, Brazil and West Africa but clearly US crude is very important driver for our business today and the medium term.

J Mintzmyer

Absolutely, the whole basin is well positioned to grow vs. OPEC cuts, and I know when we see the OPEC cuts now, we fear short-term rate pain, but the long-term setup just looks very nice and it's great to see them (AG origination) shedding market share!

Marel

Very general question. EURN in my view is a 'bluechip' shipping company. Shipping is very cyclical, so how can one create a sustainable model over the long run in terms of total shareholder returns? e.g. how can EURN, *on average*, generate sustainable shareholder returns of 10%+ per annum (i.e. have the share price go up in the long run), as is the case with most non-shipping bluechip companies? In shipping, we are accustomed to share prices struggling, to put it mildly. Sure, it’s a challenging sector as ships are depreciating assets, but is there anything that hasn’t be done in the past which could change this bad industry record in terms of capital allocation, M&A etc e.g. are lower dividend payouts and share buybacks here to stay?

Paddy Rodgers

Great question. There is potential to try and "smooth" these returns out but we have to remember the industry structure and background makes this difficult.

We are a very cyclical but also seasonal business but in answer to your question - with the help of capital markets providing finance and therefore discipline then we can act in order to try and achieve the objective you state.

This means acting like a farmer - in seasons when things are tough you should act counter cyclically as we did with Gener8 deal but in the good times make sure you retain capital. The industry remains very fragmented which is another challenge but all shipowners can act rationally and this will focus more on returns and in time drive better behaviour

Hope that helps - we could a forum on that subject all on its own!

Marel

Thank you, very helpful!

Paddy Rodgers

The more the crude tanker sector is exposed to capital markets the better as most participants in the quoted space do act rationally and responsibly

J Mintzmyer

Seems to be what we've seen. It also seems that crude tanker management teams are broadly more responsible than other sectors we've watched... $EURN leading the way with a very responsible balance sheet and capital returns profile.

FRKO

Good morning, you spoke about your capital allocation intentions earlier and mentioned the following things:

  1. Enhanced cash dividend
  2. Share buy backs
  3. Repayment of debt
  4. Where possible accretive M&A based on strict set of criteria
  5. Acquisition of ships

Which of these measures have priority for you at the moment and in what order?

Paddy Rodgers

Any order will change depending on circumstances - as i said earlier share buy backs for now is priority and we are acting upon that.

FRKO

Thanks. One more question on crude takeaway capacity in the U.S. if I may:

The current problems reg. crude takeaway capacity esp. from the Permian basin will most likely be resolved some time this year. Will the Gulf Coast be ready to deal with the higher volumes (vessel loading etc.)?

Paddy Rodgers

We believe so yes. Estimates we have seen see 5-6m bpd export capacity already and LOOP is becoming more proactive in how it is looking at exports. also there are 4-5 projects currently looking to get funded for offshore terminals in the gulf - basically a platform attached to a hose in the gulf itself. these can be put up very quickly.

Medium and longer term ports will come more into play as dredging projects are completed. from a tanker perspective the intense competition between ports on USGC is very encouraging.

Rdjunke

J has a number, but where do you yourselves see your NAV?

Paddy Rodgers

Consensus NAV from the analysts publishing research on us is $9.45.

J Mintzmyer

Seems a tiny bit low and not reflective of the recent asset price appreciation. Also Q4-18 cash flows should bolster you nicely. FWIW, I see $EURN at $10.00 right now rising up to around $10.50 with cash flow included.

Paddy Rodgers

As i said, consensus from 19 analysts and a little dated awaiting Q4 results which we will publish next Thursday.

FRKO

We all are very much looking forward to your Q4 results.

J Mintzmyer

Looking forward to a strong/clear Q4-18 from you. Hopefully you beat consensus EPS as well and start this season off strong... but I digress! Time for 1 more from the gallery and then I have a final question on IMO 2020?

Original Braila

Why Belgium and not Bermuda considering witholding taxes on divs

Paddy Rodgers

Euronav originated in Belgium and is Belgium domiciled.

The tax question is something we look at and i would encourage you to contact us (IR@euronav.com) with any considered views on this as it is important to us given the witholding tax rate.

Original Braila

Thanks

J Mintzmyer

Final question, bit back in the weeds, so apologies there, but with IMO 2020 the key hot topic today...

In your recent presentation you estimate 0.5 mbpd of stranded HSFO. After about 60 days land filled storage is filled up. From there on the equivalent of 1 VLCC will be used for floating storage every 4 days until the market clears. How will the market clear and when?

Directly related, from an investor point of view and from where you sit, what is the most significant effect of IMO 2020 that no one has spotted yet?

Paddy Rodgers

The presentation you refer to is more illustrative to show how quickly stranded HSFO could become an opportunity for shipping. Large tankers are the natural “home” if you will for this “product”. Shipping is safe, flexible and mobile storage. How the market actually clears will depend on many factors and where any excess HSFO is geographically. Oil companies suggest going to take 2-3 years to clear.

On the second point - Artificial employment. The key point on IMO 2020 is that it will segregate the crude barrel according to its sulphur content THROUGHOUT the entire supply chain. So as we approach 1 January 2020 I expect to see more delays, congestion and time taken to apply this segregation – thus taking out tanker capacity.

J Mintzmyer

Love it. We're clearly already in a fairly tight market situation and ton-mile demand growth is looking good. Anything we can see that improves this balance, even if it's just temporary, should be VERY good for rates/earnings.

Paddy, thanks for your time today. This was an inaugural event so definitely learned a lot today, seems like a 45-60 minute block is much more reasonable for a typed chat forum. Thanks again from all of us here! Hopefully we can keep the dialogue open as we move forward!

Paddy Rodgers

Thank You J and all those who took the time to log on. Look forward to doing this again in the near future. -Paddy.

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Disclosure: I am/we are long DHT.